ANALYSIS-A trimmer, sharper Groupon seen in the post-Mason era

March 03, 2013|Reuters

By Alistair Barr

SAN FRANCISCO, March 3 (Reuters) - Groupon Inc under a new chief executive should look a lot trimmer with asharply reduced international arm, a more focused business - andminus its large and once internally celebrated editorial staff,analysts and investors say.

The exit of co-founder and CEO Andrew Mason - fired afteranother disappointing set of quarterly results slashed Groupon'smarket value by a quarter - may usher in a new, more "serious"era marked more by careful, painful decisions rather thanreckless geographical and market expansion.

Consumer and merchant demand is sliding for Groupon's dailydeals - online vouchers offering discounts on local goods andservices. And a slew of new businesses Mason acquired orexpanded into are either lower margin or have yet to gaintraction.

"It's time to change Groupon from a start-up into a maturecorporation," said Jason Jones of HighStep Capital, a technologyinvestment firm that does not own Groupon shares. "They willprobably go outside and find a CEO who has run a majormulti-national brand before. They need to tame the beast."

Ted Leonis and Eric Lefkofsky - an early mentor of Mason andGroupon's largest shareholder, respectively - are serving asco-CEOs until the company finds Mason's replacement.

Groupon shares jumped 12 percent to $5.06 on Friday on hopesthere will be more focus on profits. But those gains still leavethe stock down more than 70 percent from its IPO price,highlighting the challenges ahead for Mason's replacement.

"Changing the CEO is not going to change the fundamentally tough aspects of the business," said Dan Niles, chief investmentofficer of tech-focused hedge fund firm AlphaOne CapitalPartners, which does not own Groupon stock.

Underscoring the uphill climb for any incoming CEO,LivingSocial, Groupon's main rival, has struggled so much thatit was recently forced into a painful new financing round byexisting investors - offering a spate of concessions to snag a$110 million lifeline.

"Mason built a good business, but it is difficult to run atscale," Niles added. "The new CEO will have to be somebody witha strong stomach."

CONSOLIDATION

Rocky Agrawal, a Silicon Valley-based independent analyst,expects Groupon's editorial staff to be cut. These employeeswrite the quirky descriptions of deals that made Groupon famous,but it is not clear how much value they provide, Agrawal said.

Some merchants get annoyed when Groupon's writers try to befunny but end up describing their businesses inaccurately, heexplained.

This editorial department "was Andrew's baby," so now thathe has gone, it is at risk, Agrawal said.

Such a change would be part of a broader shift in Groupon'sculture that will come with a new CEO.

"Groupon will be less quirky, more serious," said RobSolomon, a former COO at the company. Groupon will be "all aboutexecution."

Groupon is also likely to ratchet back its global ambitions,according to Agrawal, Solomon and others.

Groupon would be more profitable if it cut its 10 percent or20 percent worst-performing markets, Jordan Rohan, an analyst atStifel Nicolaus, said during a Wednesday conference callfollowing the quarterly results.

"I'm wondering how you make sense of being in 500 differentmarkets in 48 different countries," Rohan added.

Kal Raman, the current COO, noted that more than twice thenumber of people are needed to handle an international divisiondeal, than a deal in the United States.

"We are continuing to evaluate every single market, everysingle city we are in to make sure that we are able to take careof the merchants and customers, more importantly ourshareholders," Raman said.

A Groupon spokesman said there are no "definite" plans forinternational job cuts, but he noted that there were staffreductions in the United States when the company automatedprocesses there last year.

Groupon's new CEO may also cut the company's goods business,which offers discounts on products such as electronic gadgets,some analysts said.

Groupon Goods is on course to generate $2 billion in annualrevenue, but it is less profitable than the original dealsbusiness and it is not focused on local merchants, according toSameet Sinha, an analyst at B. Riley Caris.

Groupon will likely become a more focused online localadvertising and marketing company, the analyst said.

"The torrid growth story is gone. It will be more aboutconsolidating at this point," Sinha added.